A buy-to-let mortgage and a residential mortgage both allow you to borrow money to buy a property. The key difference is what that property’s used for: a buy-to-let mortgage enables a landlord or property investor to buy a place to rent out, but a residential mortgage is to buy the home you live in.

This difference drives many others, including the way lenders approach how much you can afford to borrow, and the safeguards you get as a borrower. We explain the key differences in this guide.

Your home may be repossessed if you do not keep up repayments on your mortgage. This article is for general information only and isn't personal financial advice. Habito by Monzo is a mortgage broker, not a lender. We’re authorised and regulated by the Financial Conduct Authority (FRN 714187).

Buy-to-let vs residential mortgage at a glance

Here’s a summary of the key differences between these 2 mortgage types. We explain each one below the table.

The key differences between residential and buy-to-let mortgages

Below, we’ve explained each of these key differences further.

Purpose: Living in it vs renting it out

This difference underpins everything else. You can’t normally let out your home if you have a residential mortgage without special permission from your lender.

Equally, you can’t normally live in a buy-to-let property (but there’s an exception to this which we cover in the section on regulation)..

Deposit and loan-to-value (LTV)

For a home you live in, your deposit could range from 5% to 10% or more. With a 10% deposit, your mortgage would be 90% of the value of the property, for example. This 90% is called the “loan to value (LTV)” ratio: it’s the percentage of a property’s value that you borrow.

With buy-to-let, the deposit is typically 25% because many lenders cap the LTV around 75%, according to MoneyHelper.

How lenders decide what you can borrow

When you apply for a residential mortgage, the lender will check your personal income (typically lending 4–4.5 times your salary, but this depends on various factors). Lenders also look at affordability: based on your income and outgoings, how much can you afford in monthly repayments?

Buy-to-let mortgages, however, are generally assessed using the expected rental income from the property. Lenders typically require the rent to cover a certain percentage of the mortgage interest payment. This is called the ‘interest coverage ratio (ICR)’. The ICR and the interest rate used to stress-test the mortgage vary between lenders, and some lenders may also have minimum personal income requirements. This means the amount you can borrow will depend on the lender’s individual criteria as well as the expected rental income..

Buy-to-let borrowing example

Let’s say the property is worth £320,000 and you have a deposit of £80,000 (25%). You’d need a mortgage of £240,000. Whether £1,500 a month in expected rental income would be enough to support that mortgage would depend on the lender’s ICR, the interest rate they use to stress-test the mortgage and any other eligibility criteria. Different lenders can therefore reach different maximum borrowing amounts using the same expected rental income

Get an estimate of how much you might be able to borrow for a buy-to-let using our buy-to-let mortgage calculator.

These figures are illustrative examples only and are not guaranteed borrowing amounts. The amount you may be able to borrow depends on factors including your income, regular spending, credit history, deposit size, and lender affordability checks.

Repayment vs interest-only

Residential mortgages are typically repayment deals, meaning you pay a bit of the capital off each month as well as interest. Buy-to-let mortgages are usually interest-only. This means monthly payments are lower but you still owe the full amount of the loan at the end of the mortgage, so you need a plan for paying it off (by selling or refinancing, for example).

Interest rate and fees

Rates and product fees for residential deals are usually lower than those for buy-to-let mortgages, which are more risky for lenders.

Regulation

Residential mortgages are regulated by the UK financial watchdog, the Financial Conduct Authority. This gives you consumer protections and lenders have to abide by rules on affordability.

Most buy-to-let mortgages are not regulated, as they’re seen as commercial rather than consumer products. There’s an exception to this, which is a regulated family buy-to-let with a paying tenant. This allows you to rent out more than 40% of your property to a close relative (like a child, parent or sibling) and live there alongside them. But this is quite specialist.

Income tax and capital gains tax

When you sell the home where you live, if you make a profit that’s usually exempt from capital gains tax (CGT). This is called “private residence relief”. But there’s no exemption when you sell a buy-to-let property. And the rental payments you get are taxable as income.

Find out more about the costs of being a landlord. Tax rules change and always depend on your individual circumstances.

Stamp duty

Rates of stamp duty (or its equivalent) when you buy a property to live in are different from rates for buy-to-lets or second homes. In England and Northern Ireland there’s a surcharge. Scotland’s version is the “additional dwelling supplement” and Wales applies a higher tax rate if you already own a property. For more, see our guide to stamp duty.

Can you rent out a home on a residential mortgage?

Generally, you can’t rent out the home where you live unless you have your mortgage lender’s permission. You need to get “consent to let”, which is a temporary agreement (typically lasting 6-12 months but some go up to 24 months) to allow you to let out a home with a residential mortgage. This might incur a small increase in your interest rate.

Letting out a residential property without permission is likely to be a breach of your mortgage contract, so always speak with your lender if you’re considering renting out your home.

For a long-term let, it might make sense to switch to a buy-to-let mortgage. You might want to talk through the pros and cons with a mortgage broker.

Can you switch between a residential and buy-to-let mortgage?

Yes, it’s usually possible to switch from a residential to a buy-to-let deal, and vice versa – usually when it’s time to remortgage. But be aware that there will be different eligibility criteria and fees, and there may be a hefty early repayment charge for your existing mortgage, if you’re paying it off before the end of the fixed term period, for example. Find out more in our guide on changing a residential mortgage to a buy-to-let.

Can a first-time buyer get a buy-to-let mortgage?

Yes, it’s possible to get a buy-to-let as your first property, but it’s harder. There will be fewer lenders to choose from, you’ll likely need a larger deposit and a solid income.

It’s also worth remembering that once you’ve bought a property, this can have a knock-on effect on future purchases, including when you’re buying a home to live in. If you have a lifetime ISA (LISA), for example, you can’t use that to get a buy-to-let. But after you’ve bought one, you won’t be able to use your LISA to buy a home to live in because you’ll no longer count as a first-time buyer. That means you’ll have to wait to use your LISA in retirement or pay a penalty to withdraw the money.

Which mortgage is right for you?

Ultimately, a residential mortgage is for those who plan to live in the property, while buy-to-let mortgages are for those investing in a property they want to rent out. The right buy-to-let mortgage for you will depend on several factors including the rental income, your tax position and your plans.

Find out your mortgage options

If you’re considering the choice between residential and buy-to-let, or you just want to explore your options, you can chat with one of our friendly mortgage experts for free.

Most buy-to-let mortgages are not regulated by the FCA.

Options available to you will depend on lender criteria, affordability and your personal circumstances.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Habito by Monzo is a mortgage broker, not a lender. We’re authorised and regulated by the Financial Conduct Authority (FRN 714187). This content is intended for general guidance and is not a substitute for personalised mortgage advice.

This article is based on guidance from organisations such as MoneyHelper, Citizens Advice and GOV.UK. Mortgage rules and legal processes can change, so it's worth checking the latest information or speaking to a qualified adviser.

Information is correct at the time of writing and may change. Always check the latest terms and conditions before taking out a mortgage deal.

This article is for general information only and isn't personal financial advice.